Cisco Stock Is Slipping. An Analyst Downgraded Shares to Market Perform.

Cisco stock is 0.5% lower at $51.31.

Leopold is particularly concerned about declining sales for campus networks—he sees demand in the category falling in the mid-to-high single digits in the quarter, and he notes that rivals Hewlett Packard Enterprise (HPE) and
Juniper Networks
(JNPR) are both forecasting market-share gains in the category.

He also asserts that while Cisco’s pending $28 billion acquisition of
Splunk
(SPLK) makes strategic sense, it reduces the company’s options at a time when competitive pressures are mounting in particular in the security-software sector.

Leopold writes, “Although the acquisition makes strategic sense, the employment of $28 billion caps Cisco’s ability to make other deals, raise its dividend or buy other companies.”

The analyst writes that channel checks find Cisco should have a strong October, but he sees risks further out.

In recent quarters, the Street has zeroed in on both Cisco’s declining backlog, which it has been milking to drive strong revenue growth, and declining year-over-year orders.

“We imagine Cisco could forecast a worse-than-seasonal sales decline in its January quarter while customers absorb prior purchases and the macro remains weak,” Leopold writes. He adds that “hyperscale operators”—cloud-computing companies—“remain a bright spot,” but account for only about 6% of overall sales.

On the company’s earnings announcement for the fiscal fourth quarter ended in July, Cisco noted that the period ended with twice its normal backlog. But the company expects the figure to return to normal levels in the new fiscal year, with most of that worked down in the October quarter.

Write to Eric J. Savitz at [email protected]